KENNAMETAL INC (KMT) FY 2023 MD&A

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in connection with the consolidated financial statements of Kennametal Inc. and the related financial statement notes included in Item 8 of this Annual Report. Unless otherwise specified, any reference to a “year” is to our fiscal year ended June 30. Additionally, when used in this Annual Report, unless the context requires otherwise, the terms “we,” “our” and “us” refer to Kennametal Inc. and its subsidiaries.

OVERVIEW Kennametal Inc. was founded based on a tungsten carbide technology breakthrough in 1938. The Company was incorporated in Pennsylvania in 1943 as a manufacturer of tungsten carbide metal cutting tooling and was listed on the New York Stock Exchange (NYSE) in 1967. With more than 80 years of materials expertise, the Company is a global industrial technology leader, helping customers across the aerospace and defense, earthworks, energy, general engineering and transportation industries manufacture with precision and efficiency. This expertise includes the development and application of tungsten carbides, ceramics, super-hard materials and solutions used in metal cutting and extreme wear applications to keep customers up and running longer against conditions such as corrosion and high temperatures.

Our standard and custom product offering spans metal cutting and wear applications including turning, milling, hole making, tooling systems and services, as well as specialized wear components and metallurgical powders. End users of the Company's metal cutting products include manufacturers engaged in a diverse array of industries including: the manufacturers of transportation vehicles and components, machine tools and light and heavy machinery; airframe and aerospace components; and energy-related components for the oil and gas industry, as well as power generation. The Company’s wear and metallurgical powders are used by producers and suppliers in equipment-intensive operations such as road construction, mining, quarrying, oil and gas exploration, refining, production and supply, and for aerospace and defense.

Throughout Management's Discussion and Analysis of Financial Condition and Results of Operations (the MD&A), we refer to measures used by management to evaluate performance. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, constant currency regional sales growth (decline) and constant currency end market sales growth (decline). The explanation at the end of the MD&A provides the definition of these non-GAAP financial measures as well as details on their use and a reconciliation to the most directly comparable GAAP financial measures.

Our sales of $2,078.2 million for the year ended June 30, 2023 increased 3 percent year-over-year, reflecting 9 percent organic sales growth, partially offset by a 5 percent unfavorable currency exchange effect and an unfavorable business days effect of 1 percent.

To better align with the Company's strategic goals and initiatives, certain of the end markets that are reported externally and used to analyze sales performance have been redefined. The changes include 1.) defense sales were moved from general engineering and are now combined with aerospace sales for a new "aerospace and defense" end market, 2.) certain Metal Cutting sales have been reclassified from general engineering to the aerospace and defense end market, and 3.) Infrastructure's ceramics sales have been reclassified from energy to the general engineering end market. All periods presented have been retrospectively restated to align with the new end markets.

Operating income was $192.4 million in 2023 compared to $218.1 million in the prior year. The decrease in operating income was primarily due to higher raw material costs of approximately $72 million, higher wages and general inflation, unfavorable foreign currency exchange of approximately $18 million, under-absorption of approximately $10 million within the Infrastructure segment, temporary supply chain disruptions of approximately $5 million, and higher restructuring and related charges of approximately $2 million. These factors were partially offset by higher price realization and, in the Metal Cutting segment, higher sales volumes. Operating margin in 2023 was 9.3 percent compared to 10.8 percent in the prior year. In 2023, the Metal Cutting and Infrastructure segments had operating margins of 10.7 percent and 7.4 percent, respectively.

In July 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period. During 2023, the Company repurchased a total of 2 million shares of common stock for $49 million. Since the inception of the share repurchase program, the Company repurchased a total of 4.7 million shares of common stock for approximately $135 million.

On March 11, 2020, the World Health Organization declared the Coronavirus Disease 2019 (COVID-19) a pandemic bringing significant uncertainty in our end markets and operations. Since then, many jurisdictions have eased or eliminated stay-at-home, social distancing, and various other restrictions implemented at the onset of the pandemic, as the administration and acceptance of vaccines has increased and COVID-19 cases have dropped. One of the last countries to ease pandemic-control measures was China, which in December 2022 announced it would be rolling back some of its most strict anti-COVID-19 restrictions, including lockdowns, mask mandates and travel restrictions. The slow recovery in China, temporary labor shortages due to COVID-19 related absenteeism in certain regions and other supply chain challenges have created significant operating constraints on our business.

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Russia's invasion of Ukraine in February 2022 resulted in the imposition of economic sanctions on Russia by the United States, Canada, the European Union and other countries. We have experienced increased costs for energy and raw materials and other supply chain issues due, in part, to the negative impact of the conflict on the global economy. During the March quarter of 2022, the Company ceased operations in Russia and subsequently decided to liquidate its legal entity in Russia, which is expected to be completed during fiscal 2024.

In addition, our business has been negatively affected by foreign currency exchange and inflationary headwinds. We have been able to partially mitigate the effects of inflation, foreign currency exchange challenges and other disruptions through price increases on our products. We cannot predict the ultimate effect of these issues on our business, operating results or financial condition, but we will continue to monitor macroeconomic conditions and attempt to mitigate the negative effect to the extent possible.

We reported earnings per diluted share (EPS) of $1.46 for 2023. EPS for the year was unfavorably affected by restructuring and related charges of $0.06 per share. EPS in the prior year of $1.72 was unfavorably affected by restructuring and related charges of $0.03 per share and charges related to Russian and Ukrainian operations of $0.03 per share.

We generated cash flow from operating activities of $257.9 million in 2023 compared to $181.4 million during the prior year. Capital expenditures were $94.4 million and $96.9 million during 2023 and 2022, respectively. During 2023, the Company returned a total of $114 million to the shareholders through $49 million in share repurchases under the three-year share repurchase program and $65 million in dividends.

For a discussion related to the results of operations, changes in financial condition and liquidity and capital resources for fiscal 2021 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2022 Annual Report on Form 10-K, which was filed with the United States Securities and Exchange Commission on August 10, 2022.

RESULTS OF CONTINUING OPERATIONS

SALES Sales in 2023 were $2,078.2 million, a 3 percent increase from $2,012.5 million in 2022. The increase was primarily due to organic sales growth of 9 percent, partially offset by a 5 percent unfavorable currency exchange effect and 1 percent from an unfavorable business days effect.

Our sales growth (decline) by end market and region are as follows:

GROSS PROFIT Gross profit decreased $1.5 million to $646.4 million in 2023 from $648.0 million in 2022. The decrease in gross profit was primarily due to higher raw material costs of approximately $72 million, unfavorable foreign currency exchange of approximately $33 million, higher wages and general inflation, under-absorption of approximately $10 million within the Infrastructure segment and temporary supply chain disruptions of approximately $5 million. These factors were partially offset by higher price realization and, in the Metal Cutting segment, higher sales volumes. The gross profit margin for 2023 was 31.1 percent compared to 32.2 percent in 2022.

OPERATING EXPENSE Operating expense in 2023 was $437.3 million, an increase of $18.2 million, or 4.3 percent, from $419.1 million in 2022.

We invested further in technology and innovation to continue delivering high quality products to our customers. Research and development expenses included in operating expense totaled $43.1 million and $42.1 million for 2023 and 2022, respectively.

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RESTRUCTURING AND OTHER CHARGES, NET In the June quarter of fiscal 2023, we announced an initiative to streamline our cost structure while continuing to invest in our high-return commercial and operational excellence initiatives. Total restructuring and related charges for this program of $7.4 million, compared to a target of approximately $20 million, were recorded through June 30, 2023, consisting of $6.0 million in Metal Cutting and $1.4 million in Infrastructure. The majority of the remaining charges are expected to be recognized in fiscal 2024. This initiative is currently expected to deliver annualized run rate pre-tax savings of approximately $20 million by the end of fiscal 2024.

Annual Restructuring Charges

During 2023, we recorded restructuring and related charges of $6.6 million, which consisted of $5.3 million in Metal Cutting and $1.3 million in Infrastructure. These amounts are inclusive of a reversal of restructuring charges of $0.8 million related to prior actions. Also included in restructuring and other charges, net during 2023 is a net benefit of $2.5 million primarily due to the sale of properties.

During 2022, we recorded restructuring and related charges of $4.2 million, which consisted of $3.6 million in Metal Cutting and $0.6 million in Infrastructure. Of this amount, a net benefit from the reversal of restructuring charges totaled $1.2 million and restructuring-related charges of $5.5 million were included in cost of goods sold.

GAIN ON DIVESTITURE During the year ended June 30, 2020, we completed the sale of certain assets of the non-core specialty alloys and metals business within the Infrastructure segment located in New Castle, Pennsylvania to Advanced Metallurgical Group N.V. for an aggregate price of $24.0 million.

The net book value of these assets at closing was $29.5 million, and the pre-tax loss on divestiture recognized during the year ended June 30, 2020 was $6.5 million. Transaction proceeds were primarily used for capital expenditures related to our simplification/modernization efforts. During the year ended June 30, 2022, we recorded a pre-tax gain of $1.0 million on the New Castle divestiture due to proceeds held in escrow until November 2021.

AMORTIZATION OF INTANGIBLES Amortization expense was $12.6 million and $13.0 million in 2023 and 2022, respectively.

INTEREST EXPENSE Interest expense in 2023 was $28.5 million, an increase of $2.6 million, compared to $25.9 million in 2022. The increase was due to increased amounts outstanding under the Credit Agreement and higher market interest rates during 2023. The portion of our debt subject to variable rates of interest was less than 1 percent at June 30, 2023 and 3 percent at June 30, 2022. There were no borrowings outstanding under the Credit Agreement as of June 30, 2023.

OTHER EXPENSE (INCOME), NET In 2023, other expense, net was $4.3 million compared to other income, net of $14.5 million in 2022. The decrease of $18.8 million was primarily due to lower net periodic pension income and a $3 million litigation settlement related to legacy operations recognized during 2023.

INCOME TAXES The effective tax rate for 2023 was 22.7 percent compared to 27.3 percent for 2022. The year-over-year change in the effective tax rate is primarily due to the current year release of a valuation allowance related to net deferred tax assets in Brazil, a current year tax benefit related to Swiss tax reform and geographical mix.

In 2012, we received an assessment from the Italian tax authority that denied certain tax deductions primarily related to our 2008 tax return. Attempts at negotiating a reasonable settlement with the tax authority were unsuccessful; and as a result, we decided to litigate the matter. While the outcome of the litigation is still pending, the tax authority served notice in the September quarter of fiscal 2020 requiring payment in the amount of €36.0 million. Accordingly, we requested and were granted a stay and are not currently required to make a payment in connection with this assessment. We continue to believe that the assessment is baseless and accordingly, no income tax liability has been recorded in connection with this assessment in any period. However, if the Italian tax authority were to be successful in litigation, settlement of the amount alleged by the Italian tax authority would result in an increase to income tax expense for as much as €35.6 million, or $38.8 million, of which penalties and interest is €20.9 million, or $22.8 million. During the current year, the Italian government launched a tax amnesty program aimed at reducing the number of tax disputes pending before the Italian courts. Pursuant to program guidelines, payments made to successfully resolve a dispute must be received by the Italian government no later than September 30, 2023. We are currently evaluating whether this program could facilitate a resolution to this litigation.

NET INCOME ATTRIBUTABLE TO KENNAMETAL Net income attributable to Kennametal was $118.5 million, or $1.46 of earnings per diluted share (EPS) in 2023, compared to $144.6 million, or EPS of $1.72 in 2022. The decrease is a result of the factors previously discussed.

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BUSINESS SEGMENT REVIEW We operate in two reportable operating segments consisting of Metal Cutting and Infrastructure. Corporate expenses that are not allocated are reported in Corporate. Segment determination is based upon internal organizational structure, the manner in which we organize segments for making operating decisions and assessing performance and the availability of separate financial results. See Note 21 of our consolidated financial statements set forth in Item 8 of this Annual Report.

Our sales and operating income by segment are as follows:

METAL CUTTING

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In 2023, Metal Cutting sales of $1,269.8 million increased by $42.5 million, or 3 percent, from 2022. This was driven by organic growth of 10 percent, partially offset by an unfavorable foreign currency exchange effect of 6 percent and an unfavorable business days effect of 1 percent. Aerospace and defense end market sales increased in all regions as a result of our focused execution on our strategic initiatives and a continuing expansion in global travel following the COVID-19 slowdown, the effects of which were partially offset by unfavorable foreign currency exchange. Sales in the general engineering end market increased as manufacturing activity continues to recover from the COVID-19 pandemic and as underlying economic activity expands, the effects of which were partially offset by unfavorable foreign currency exchange, our exit from Russia and a slower recovery in China. Energy end market sales increased in the Americas and to a lesser extent Asia Pacific due to pricing efforts, the effects of which were offset by unfavorable foreign currency exchange and a decline in EMEA. Transportation end market sales benefited from improving customer supply chains and execution on our strategic initiatives in key growth areas in the Americas and EMEA, the effects of which were partially offset by a decline in Asia Pacific due to lower economic activity in China and unfavorable foreign currency exchange. On a regional basis, sales in the Americas increased primarily due to the successful execution on our strategic initiatives and continued broad and resilient demand of our end markets. Sales growth in EMEA reflects the execution on our strategic initiatives, the effects of which were offset by unfavorable foreign currency exchange. Sales in Asia Pacific benefited from our strategic initiatives and the continuing expansion of travel, the effects of which were offset by a slower recovery in China from COVID-related disruptions and unfavorable foreign currency exchange.

In 2023, Metal Cutting operating income was $135.8 million, a $14.4 million increase from 2022. The increase in operating income was primarily due to higher price realization, higher sales volumes and a gain of approximately $3 million on property sales. These factors were partially offset by higher raw material costs of approximately $24 million, higher wages and general inflation, including an inflationary bonus of $2 million for certain German employees, unfavorable foreign currency exchange of approximately $12 million and temporary supply chain disruptions. Metal Cutting operating margin in 2023 was 10.7 percent compared to 9.9 percent in the prior year.

INFRASTRUCTURE

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In 2023, Infrastructure sales of $808.4 million increased by $23.2 million, or 3 percent, from 2022. This was driven by organic growth of 7 percent, partially offset by an unfavorable foreign currency exchange effect of 4 percent. Energy end market sales increased primarily due to strength in U.S. oil and gas. Sales in the general engineering end market increased in all regions primarily due to strong demand in wear components, which was partially offset by unfavorable foreign currency exchange. Earthworks end market sales increased in all regions primarily due to underlying demand in mining, the effects of which were offset by unfavorable foreign currency exchange. Aerospace and defense end market sales were negatively affected by order timing and unfavorable foreign currency exchange. On a regional basis, sales in EMEA increased in all end markets, the effects of which were partially offset by unfavorable foreign currency exchange. Sales increased in Asia Pacific primarily in earthworks and general engineering, the effects of which were offset by unfavorable foreign currency exchange and a decline in the energy end market. Sales in the Americas increased in energy, general engineering and to a lesser extent earthworks, the effects of which were partially offset by decreases in aerospace and defense and unfavorable foreign currency exchange.

In 2023, Infrastructure operating income was $59.8 million, a $39.1 million decrease from 2022. The decrease in operating income was primarily due to higher raw material costs of approximately $48 million, higher wages and general inflation, under-absorption of approximately $10 million, unfavorable foreign currency exchange of approximately $4 million and temporary supply chain disruptions. These factors were partially offset by higher price realization. Infrastructure operating margin in 2023 was 7.4 percent compared to 12.6 percent in the prior year.

CORPORATE

In 2023, Corporate expense increased $1.0 million from 2022.

LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the primary source of funding for working capital requirements, reinvesting in our business through capital expenditures and returning value to shareholders through dividends and share repurchases. During the year ended June 30, 2023, cash flow provided by operating activities was $257.9 million.

During fiscal 2022, we entered into the Sixth Amended and Restated Credit Agreement dated as of June 14, 2022 (the Credit Agreement). The Credit Agreement is a five-year, multi-currency, revolving credit facility, which we use to augment cash from operations and as an additional source of funds. The Credit Agreement provides for revolving credit loans of up to $700.0 million for working capital, capital expenditures and general corporate purposes. The Credit Agreement allows for borrowings in U.S. dollars, euros, Canadian dollars, pounds sterling and Japanese yen. Interest payable under the Credit Agreement is based upon the type of borrowing under the facility and may be (1) Euro Interbank Offered Rate (EURIBOR), Sterling Overnight Index Average (SONIA), Tokyo Interbank Offered Rate (TIBOR), Secured Overnight Financing Rate (SOFR), and Canadian Dollar Offered Rate (CDOR) for any borrowings in euros, pounds sterling, yen, U.S. dollars, and Canadian dollars, respectively, plus an applicable margin, (2) the greater of the prime rate or the Federal Funds effective rate plus an applicable margin, or (3) fixed as negotiated by us. The Credit Agreement matures in June 2027.

The Credit Agreement requires us to comply with various restrictive and affirmative covenants, including one financial covenant: a maximum leverage ratio where debt, net of domestic cash in excess of $25 million and sixty percent of the unrestricted cash held outside of the United States, must be less than or equal to 3.75 times trailing twelve months EBITDA, adjusted for certain non-cash expenses.

As of June 30, 2023, we were in compliance with all covenants of the Credit Agreement and we had no borrowings outstanding and $700.0 million of availability. There were $19 million of borrowings outstanding as of June 30, 2022.

Borrowings on other lines of credit and notes payable were $0.7 million and $2.2 million at June 30, 2023 and 2022, respectively. The lines of credit represented short-term borrowings under credit lines with commercial banks in the various countries in which we operate. The availability of the credit lines, translated into U.S. dollars at June 30, 2023 exchange rates, totaled $54.5 million.

For the year ended June 30, 2023, average daily borrowings outstanding under the Credit Agreement were approximately $79.8 million. The weighted average interest rate on borrowings under the Credit Agreement was 5.0 percent for the year ended June 30, 2023.

Based upon our debt structure at June 30, 2023, less than 1 percent of our debt was exposed to variable rates of interest. At June 30, 2022, 3 percent was exposed to variable rates of interest.

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We consider the majority of the $1.5 billion unremitted earnings of our non-U.S. subsidiaries to be permanently reinvested. With regard to these unremitted earnings, we have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs associated with our domestic debt service requirements. Determination of the amount of unrecognized deferred tax liability related to indefinitely reinvested earnings is not practicable due to our legal entity structure and the complexity of U.S. and local tax laws. With regard to the small portion of unremitted earnings that are not indefinitely reinvested, we maintain a deferred tax liability for foreign withholding and U.S. state income taxes. The deferred tax liability associated with unremitted earnings of our non-U.S. subsidiaries not permanently reinvested is $4.8 million as of June 30, 2023.

At June 30, 2023, we had cash and cash equivalents of $106.0 million. Total Kennametal Shareholders’ equity was $1,275.4 million and total debt was $595.9 million. Our current senior credit ratings are considered investment grade. We believe that our current financial position, liquidity and credit ratings provide us access to the capital markets. We continue to closely monitor our liquidity position and the condition of the capital markets, as well as the counterparty risk of our credit providers.

Cash generated from operations is expected to meet our planned capital expenditures of approximately $100 million to $110 million and expected dividend payments of approximately $65 million in fiscal 2024. There can be no assurance, however, that we will generate cash from operations in line with our expectations, or that these projections will remain constant throughout fiscal 2024. If cash generated from operations is not sufficient to support these activities, we may be required to use existing cash and cash equivalents, reduce capital expenditures or borrow under the Credit Agreement. We believe that our cash and cash equivalents, cash flow from operations, and available borrowings are sufficient to meet both the short-term and long-term capital needs of the Company.

The following is a summary of our contractual obligations and other commercial commitments as of June 30, 2023:

(1)Long-term debt includes interest obligations of $153.4 million and excludes debt issuance costs of $3.6 million.

(2)Annual payments are expected to continue into the foreseeable future at the amounts noted in the table.

(3)Purchase obligations consist of purchase commitments for materials, supplies and machinery and equipment as part of the ordinary conduct of business. Purchase obligations with variable price provisions were determined assuming market prices as of June 30, 2023 remain constant.

(4)Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. These amounts include interest of $1.0 million and a penalty of $0.1 million accrued related to such positions as of June 30, 2023. If a tax authority agrees with the tax position taken or expected to be taken or the applicable statute of limitations expires, then additional payments will not be necessary.

The standby letters of credit relate to insurance and other activities. The guarantees are non-debt guarantees with financial institutions, which are required primarily for security deposits, product performance guarantees and advances.

Share Repurchase Program In July 2021, the Board of Directors of the Company approved a share repurchase program authorizing the Company to purchase up to $200 million of the Company's common stock over a three-year period. During 2023, the Company repurchased 2 million shares of common stock for $49 million.

Dividends In fiscal 2023, the Board of Directors of the Company declared a dividend of $0.20 per share in each quarter for a total of $65 million in dividends returned to the shareholders.

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Cash Flow Provided by Operating Activities

During 2023, cash flow provided by operating activities was $257.9 million, compared to $181.4 million in 2022. During 2023, cash flow provided by operating activities consisted of net income and non-cash items amounting to $284.0 million and changes in certain assets and liabilities netting to an outflow of $26.1 million. Contributing to the change in certain assets and liabilities were a decrease in accounts payable and accrued liabilities of $32.5 million, an increase in accounts receivable of $11.5 million and a decrease in accrued pension and postretirement benefits of $10.1 million, partially offset by a decrease in inventories of $17.6 million.

Cash flow provided by operating activities was $181.4 million in 2022. During 2022, cash flow provided by operating activities consisted of net income and non-cash items amounting to $310.2 million and changes in certain assets and liabilities netting to an outflow of $128.7 million. Contributing to the change in certain assets and liabilities were an increase in inventories of $127.4 million in part due to increased safety stock for potential supply chain disruptions and higher raw material costs, a decrease in accrued pension and postretirement benefits of $24.2 million and an increase in accounts receivable of $14.4 million, partially offset by an increase in accounts payable and accrued liabilities of $32.0 million and an increase in accrued income taxes of $10.2 million.

Cash Flow Used for Investing Activities

Cash flow used for investing activities was $89.2 million for 2023, a decrease of $5.7 million, compared to $94.9 million in 2022. During 2023, cash flow used for investing activities included capital expenditures, net of $89.4 million, which consisted primarily of equipment upgrades.

Cash flow used for investing activities was $94.9 million for 2022. During 2022, cash flow used for investing activities included capital expenditures, net of $96.0 million, which consisted primarily of equipment upgrades, partially offset by proceeds of $1.0 million from the New Castle divestiture.

Cash Flow Used for Financing Activities

Cash flow used for financing activities was $143.1 million for 2023 compared to $150.7 million in 2022. During 2023, cash flow used for financing activities primarily included $64.5 million of cash dividends paid to shareholders, $49.3 million in common shares repurchased, primarily under the share repurchase program, $19.0 million from the repayment of borrowings under the Credit Agreement and $6.0 million of the effect of employee benefit and stock plans and dividend reinvestment.

Cash flow used for financing activities was $150.7 million for 2022. During 2022, cash flow used for financing activities included $85.5 million in common shares repurchased, primarily under the share repurchase program, $66.6 million of cash dividends paid to shareholders, $6.9 million of the effect of employee benefit and stock plans and dividend reinvestment and $6.1 million of a decrease in notes payable, partially offset by $19.0 million from borrowings under the Credit Agreement.

FINANCIAL CONDITION At June 30, 2023, total assets were $2,547.2 million, a decrease of $26.3 million from $2,573.5 million at June 30, 2022. Total liabilities decreased $49.2 million from $1,282.3 million at June 30, 2022 to $1,233.1 million at June 30, 2023.

Working capital was $592.8 million at June 30, 2023, an increase of $53.8 million from $539.1 million at June 30, 2022. The increase in working capital was primarily driven by a decrease in accounts payable of $24.5 million, a decrease in revolving and other lines of credit and notes payable of $20.5 million, an increase in cash and cash equivalents of $20.4 million, an increase in accounts receivable, net of $12.0 million and a decrease in accrued income taxes of $4.3 million. Partially offsetting these items was a decrease in other current assets of $17.1 million and a decrease in inventories of $13.2 million. Currency exchange rate effects decreased working capital by a total of approximately $0.1 million, the effects of which are included in the aforementioned changes.

Property, plant and equipment, net decreased $33.0 million from $1,002.0 million at June 30, 2022 to $969.1 million at June 30, 2023, primarily due to depreciation of $121.4 million and disposals of $5.0 million, partially offset by capital additions of $94.4 million and a favorable currency exchange effect of approximately $1.5 million.

At June 30, 2023, other assets were $551.4 million, an increase of $4.6 million from $546.8 million at June 30, 2022. The primary drivers for the increase were an increase in deferred income taxes of $10.9 million, an increase in goodwill of $5.3 million and an increase in long-term prepaid pension benefit of $4.1 million. Partially offsetting these items was amortization of $12.6 million and a decrease in operating right-of-use assets of $4.2 million. Currency exchange rate effects increased other assets by a total of approximately $9 million, the effects of which are included in the aforementioned changes.

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Kennametal Shareholders’ equity was $1,275.4 million at June 30, 2023, an increase of $22.9 million from $1,252.6 million in the prior year. The increase was primarily due to net income attributable to Kennametal of $118.5 million and capital stock issued under employee benefit and stock plans of $17.8 million, partially offset by cash dividends paid to Kennametal Shareholders of $64.5 million and the repurchase of capital stock of $49.3 million primarily under the share repurchase program.

EFFECTS OF INFLATION Rising costs, including the cost of certain raw materials, continue to affect our operations throughout the world. We experienced higher levels of inflation in 2023 and expect inflation will continue to be a challenge in fiscal 2024. We will strive to minimize the effects through cost containment, productivity improvements and price increases.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the U.S., we make judgments and estimates about the amounts reflected in our consolidated financial statements. As part of our financial reporting process, our management collaborates to determine the necessary information on which to base our judgments and develops estimates used to prepare the consolidated financial statements. We use relevant information available at the end of each period to make these judgments and estimates. Our significant accounting policies are described in Note 2 of our consolidated financial statements, which are included in Item 8 of this Annual Report. We believe that the following discussion addresses our critical accounting policies.

Revenue Recognition The Company's contracts with customers are comprised of purchase orders, and for larger customers, may also include long-term agreements. We account for a contract when it has approval and commitment from both parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. These contracts with customers typically relate to the manufacturing of products, which represent single performance obligations that are satisfied when control of the product passes to the customer. The Company considers the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession and customer acceptance when determining when control transfers to the customer. As a result, revenue is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract. The shipping terms vary across all businesses and depend on the product, customary local commercial terms and the type of transportation. Shipping and handling activities are accounted for as activities to fulfill a promise to transfer a product to a customer and as such, costs incurred are recorded when the related revenue is recognized. Payment for products is due within a limited time period after shipment or delivery, typically within 30 to 90 calendar days of the respective invoice dates. The Company does not generally offer extended payment terms.

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Amounts billed and due from our customers are classified as accounts receivable, less allowance for doubtful accounts on the consolidated balance sheets. Certain contracts with customers, primarily distributor customers, have an element of variable consideration that is estimated when revenue is recognized under the contract. Variable consideration primarily includes volume incentive rebates, which are based on achieving a certain level of purchases and other performance criteria as established by our distributor programs. These rebates are estimated based on projected sales to the customer and accrued as a reduction of net sales as they are earned. The majority of our products are consumed by our customers or end users in the manufacture of their products. Historically, we have experienced very low levels of returned products and do not consider the effect of returned products to be material. We have recorded an estimated returned goods allowance to provide for any potential returns.

We warrant that products sold are free from defects in material and workmanship under normal use and service when correctly installed, used and maintained. This warranty terminates 30 days after delivery of the product to the customer and does not apply to products that have been subjected to misuse, abuse, neglect or improper storage, handling or maintenance. Products may be returned to Kennametal only after inspection and approval by Kennametal and upon receipt by the customer of shipping instructions from Kennametal. We have included an estimated allowance for warranty returns in our returned goods allowance discussed above.

The Company records a contract asset when it has a right to payment from a customer that is conditioned on events that have occurred other than the passage of time. The Company also records a contract liability when customers prepay but the Company has not yet satisfied its performance obligation. The Company did not have any material remaining performance obligations, contract assets or liabilities as of June 30, 2023 and 2022.

The Company pays sales commissions related to certain contracts, which qualify as incremental costs of obtaining a contract. However, the Company applies the practical expedient that allows an entity to recognize incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would have been recognized is one year or less. These costs are recorded within operating expense in our consolidated statements of income.

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Stock-Based Compensation We recognize stock-based compensation expense for all stock options, restricted stock awards and restricted stock units over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional service (substantive vesting period). Forfeitures are recorded as incurred. We utilize the Black-Scholes valuation method to establish the fair value of all stock option awards. Time vesting stock units are valued at the market value of the stock on the grant date. Performance vesting stock units with a market condition are valued using a Monte Carlo model.

Accounting for Contingencies We accrue for contingencies when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment in both assessing whether or not a liability or loss has been incurred and estimating the amount of probable loss. The significant contingencies affecting our consolidated financial statements include environmental, health and safety matters and litigation.

Long-Lived Assets We evaluate the recoverability of property, plant and equipment, operating lease right-of-use (ROU) assets and intangible assets that are amortized whenever events or changes in circumstances indicate the carrying amount of such assets may not be fully recoverable. Changes in circumstances include technological advances, changes in our business model, capital structure, economic conditions or operating performance. Our evaluation is performed at the asset group level, based upon, among other things, our assumptions about the estimated future undiscounted cash flows these assets are expected to generate. When the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss to the extent that carrying value exceeds fair value. We apply our best judgment when performing these evaluations to determine if a triggering event has occurred, the undiscounted cash flows used to assess recoverability and the fair value of the asset group.

Goodwill and Indefinite-Lived Intangible Assets We evaluate the recoverability of goodwill of each of our reporting units by comparing the fair value of each reporting unit with its carrying value. The fair values of our reporting units are determined using a combination of a discounted cash flow analysis and market multiples based upon historical and projected financial information. We perform our annual impairment tests during the June quarter in connection with our annual planning process unless there are impairment indicators based on the results of an ongoing cumulative qualitative assessment that warrant a test prior to that quarter. We apply our best judgment when assessing the reasonableness of the financial projections used to determine the fair value of each reporting unit. The discounted cash flow method was used to measure the fair value of our equity under the income approach. A terminal value utilizing a constant growth rate of cash flows was used to calculate a terminal value after the explicit projection period. The estimates and assumptions used in our calculations include revenue and gross margin growth rates, expected capital expenditures to determine projected cash flows, expected tax rates and an estimated discount rate to determine present value of expected cash flows. These estimates are based on historical experiences, our projections of future operating activity and our weighted average cost of capital (WACC). In order to determine the discount rate, the Company uses a market perspective WACC approach. The WACC is calculated incorporating weighted average returns on debt and equity from market participants. Therefore, changes in the market, which are beyond the control of the Company, may have an effect on future calculations of estimated fair value.

As of June 30, 2023, there is no goodwill allocated to the Infrastructure reporting unit. As of June 30, 2023, $269.6 million of goodwill was allocated to the Metal Cutting reporting unit. We completed an annual quantitative test of goodwill impairment and determined that the fair value of the reporting unit substantially exceeded the carrying value and, therefore, no impairment was recorded during 2023.

Further, an indefinite-lived trademark intangible asset of $10.8 million in the Metal Cutting reporting unit had a fair value that approximated its carrying value as of the date of the annual impairment test and, therefore, no impairment was recorded during 2023. To determine fair value, we assumed revenue growth rates inclusive of macroeconomic uncertainties and a residual period growth rate of 3 percent. We assumed a royalty rate of 1 percent, and the future period cash flows were discounted at 20.5 percent per annum.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill and indefinite-lived intangible impairment test will prove to be an accurate prediction of the future. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately affect the estimated fair values of the Metal Cutting reporting unit and of the indefinite-lived trademark may include such items as: (i) a decrease in expected future cash flows, specifically, a decrease in sales volume driven by a prolonged weakness in customer demand or other pressures adversely affecting our long-term sales trends and (ii) inability to achieve the sales from our strategic growth initiatives.

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Pension and Other Postretirement Benefits We sponsor pension and other postretirement benefit plans for certain employees and retirees. Accounting for the cost of these plans requires the estimation of the cost of the benefits to be provided well into the future and attributing that cost over either the expected work life of employees or over the average life of participants participating in these plans, depending on plan status and on participant population. This estimation requires our judgment about the discount rate used to determine these obligations, expected return on plan assets, rate of future compensation increases, rate of future health care costs, withdrawal and mortality rates and participant retirement age. Differences between our estimates and actual results may significantly affect the cost of our obligations under these plans.

In the valuation of our pension and other postretirement benefit liabilities, management utilizes various assumptions. Our discount rates are derived by identifying a theoretical settlement portfolio of high quality corporate bonds sufficient to provide for a plan’s projected benefit payments. This rate can fluctuate based on changes in the corporate bond yields. At June 30, 2023, a hypothetical 25 basis point increase or decrease in our discount rates would be immaterial to our pre-tax income.

The long-term rate of return on plan assets is estimated based on an evaluation of historical returns for each asset category held by the plans, coupled with the current and short-term mix of the investment portfolio. The historical returns are adjusted for expected future market and economic changes. This return will fluctuate based on actual market returns and other economic factors.

The rate of future health care cost increases is based on historical claims and enrollment information projected over the next fiscal year and adjusted for administrative charges. At June 30, 2023, a hypothetical 1 percent increase or decrease in our health care cost trend rates would be immaterial to our pre-tax income.

Future compensation rates, withdrawal rates and participant retirement age are determined based on historical information. These assumptions are not expected to significantly change. Mortality rates are determined based on a review of published mortality tables.

We expect to contribute approximately $9.3 million and $1.1 million to our pension and other postretirement benefit plans, respectively, in 2024. Expected pension contributions in 2024 are primarily for international plans.

Allowance for Doubtful Accounts We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the creditworthiness of our customers based on multiple sources of information and analyze additional factors such as our historical bad debt experience, industry concentrations of credit risk, current economic trends, changes in customer payment terms and forward-looking information. This assessment requires significant judgment. If the financial condition of our customers was to deteriorate, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at June 30, 2023.

Inventories We use the last-in, first-out method for determining the cost of a significant portion of our U.S. inventories, and they are stated at the lower of cost or market. The cost of the remainder of our inventories is measured using approximate costs determined on the first-in, first-out basis or using the average cost method, and are stated at the lower of cost or net realizable value. When market conditions indicate an excess of carrying costs over market value, a lower of cost or net realizable value provision or a lower of cost or market provision, as applicable, is recorded. Once inventory is determined to be excess or obsolete, a new cost basis is established that is not subsequently written back up in future periods.

Income Taxes The Company’s provision for income taxes is calculated based on income and statutory tax rates in the various jurisdictions in which the Company operates and requires the use of management’s estimates and judgments. Management judgment is required in determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances on deferred tax assets. Realization of our deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain. A valuation allowance is recognized if it is “more likely than not” that some or all of a deferred tax asset will not be realized. As of June 30, 2023, the deferred tax assets net of valuation allowances relate primarily to net operating loss and other carryforwards, pension benefits, accrued employee benefits and inventory. In the event that we were to determine that we would not be able to realize our deferred tax assets in the future, an increase in the valuation allowance would be required. In the event we were to determine that we are able to use our deferred tax assets for which a valuation allowance is recorded, a decrease in the valuation allowance would be required.

Swiss tax reform

Legislation was effectively enacted during the December quarter of fiscal 2020 when the Canton of Schaffhausen approved the Federal Act on Tax Reform and AHV Financing on October 8, 2019 (Swiss tax reform). Significant changes from Swiss tax reform include the abolishment of certain favorable tax regimes and the creation of a multi-year transitional period at both the federal and cantonal levels.

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The transitional provisions of Swiss tax reform allow companies to utilize a combination of lower tax rates and tax basis adjustments to fair value, which are used for tax depreciation and amortization purposes resulting in deductions over the transitional period. To reflect the federal and cantonal transitional provisions, as they apply to us, we recorded a deferred tax asset of $14.5 million during the December quarter of fiscal 2020. We considered the deferred tax asset from Swiss tax reform to be an estimate based on our current interpretation of the legislation, which was subject to change based on further legislative guidance, review with the Swiss federal and cantonal authorities and modifications to the underlying valuation. During the December quarter of the current year, we adjusted the calculation of the transitional provisions of Swiss tax reform after a review and receipt of a ruling from the Swiss federal and cantonal authorities and recorded a $2.2 million tax benefit to adjust the deferred tax asset and income tax liabilities related to fiscal years 2021 and 2022.

NEW ACCOUNTING STANDARDS

The Company did not adopt any new accounting standards during 2023 that have had or are expected to have a material impact on the Company's consolidated financial statements or disclosures.

RECONCILIATION OF FINANCIAL MEASURES NOT DEFINED BY U.S. GAAP In accordance with SEC rules, we are providing descriptions of the non-GAAP financial measures included in this Annual Report and reconciliations to the most closely related GAAP financial measures. We believe that these measures provide useful perspective on underlying business trends and results and a supplemental measure of year-over-year results. The non-GAAP financial measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes and may, therefore, also be useful to investors as they are a view of our business results through the eyes of management. These non-GAAP financial measures are not intended to be considered by the user in place of the related GAAP financial measure, but rather as supplemental information to our business results. These non-GAAP financial measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.

Organic sales growth Organic sales growth is a non-GAAP financial measure of sales growth (which is the most directly comparable GAAP measure) excluding the effects of acquisitions, divestitures, business days and foreign currency exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. We report organic sales growth at the consolidated and segment levels.

Constant currency end market sales growth (decline) Constant currency end market sales growth (decline) is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by end market excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency end market sales growth (decline) does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying end market trends by providing end market sales decline on a consistent basis. We report constant currency end market sales growth (decline) at the consolidated and segment levels.

Constant currency regional sales growth Constant currency regional sales growth is a non-GAAP financial measure of sales growth (decline) (which is the most directly comparable GAAP measure) by region excluding the effects of acquisitions, divestitures and foreign currency exchange from year-over-year comparisons. We note that, unlike organic sales growth, constant currency regional sales growth does not exclude the effect of business days. We believe this measure provides investors with a supplemental understanding of underlying regional trends by providing regional sales growth (decline) on a consistent basis. We report constant currency regional sales growth at the consolidated and segment levels.

Reconciliations of organic sales growth to sales growth are as follows:

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Reconciliations of constant currency end market sales growth (decline) to end market sales growth (decline), are as follows:

Reconciliations of constant currency regional sales growth (decline) to reported regional sales growth (decline), are as follows:

(6) Foreign currency exchange effect is calculated by dividing the difference between current period sales and current period sales at prior period foreign exchange rates by prior period sales.

(7) Aggregate sales for all end markets sum to the sales amount presented on Kennametal's consolidated financial statements.

(8) Aggregate sales for all regions sum to the sales amount presented on Kennametal's consolidated financial statements.

(9) Business days effect is calculated by dividing the year-over-year change in weighted average working days (based on mix of sales by country) by prior period weighted average working days.

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